Granholm v. Heald 3 Years LaterNotes on the current state of direct-to-consumer shipping

May 16, 2008 marked the third anniversary of the U.S Supreme Court decision in the case of Granholm v. Heald. Wine Institute figures show that 36 of the 50 states now have some form of direct shipping.

Of course, the rules are different for each state. To find out the laws for your state, go to The Wine Institute and click “State Shipping Laws” and “Who Ships Where.”

To document the growth of direct-to-consumer shipping in the last three years, we present a compilation of interviews, statistics* (data source below) and State progress reports. To see the progress made this past year, read our2nd anniversary report.

ased on 1.2 million orders for 5.0 million bottles shipped, the U.S. wine industry experienced $30+ billion in sales in 2007. Yet, the growth rate of the industry decreased from 6.9 percent in 2006 to 4.0 percent in 2007. The data highlighted a direct-to-consumer (DTC) sales growth of 27.8 percent in 2005-2006, slowing to 7.3 percent in 2006-2007.

A depressed U.S. economy was implicated as the cause for decreased growth in wine sales. However, we add that, with the increase in new wineries in many states, consumers are

visiting local wineries rather than traveling to California. Local has also become the new green.

Although California DTC sales growth declined from 52.2 to 40.9 percent in 2005-2007, New York, Florida, Virginia and Ohio have seen increased DTC sales. We should qualify that by saying that those states essentially started from zero, so any increase is large in comparison.

Tasting rooms account for a whopping 49 percent of winery direct sales. This figure includes tasting room sales but also DTC sales following a tasting room visit. Consumers also tend to purchase wines from wineries they have visited at retail outlets and restaurants, but that’s difficult to track.

What California Wineries Say

Although the following producers fall into the New Vine Logistics data, their reports present a positive position at this juncture and moving forward.

Winemaker Richard Arrowood (Arrowood Vineyards & Winery, Sonoma Valley, Calif.) sells 30 percent of his production direct to consumer. At his newly-opened winery, Amapola Creek, also in the Sonoma Valley AVA, Arrowood plans to sell his entire production, which will eventually max out at 3,000 cases, DTC.

The table shows the continued growth of St. Supéry Wine Club membership from 2001-2007, subdivided by the particular membership program subscriptions. See Fig. 2 for more St. Supery sales data.

but we like Russell’s view since Granholm lost and Heald won), 24 percent of our direct-to-consumer business now ships to states that were closed to direct shipping before the decision. Direct shipping is a critical part of our direct-to-consumer business.”

Russell detailed statistics further: Total wine club membership is 6,765 and has grown from 4,000 in 2005, a growth of 69 percent. The total number of cases sold DTC increased from 10 percent to 14 percent between May 2005 and the end of 2007. Total DTC wine revenue escalated from 10 percent to 28 percent in the same period.

According to Joe Antonini, Chairman of Andretti Winery, Napa, Calif., “We have increased our DTC shipping by 88 percent from May 2005 to May 2007.”

Partner Pat Roney explains, “Windsor Vineyards, Windsor, Calif., sells 100 percent direct to consumer. Since the change in shipping laws, we have seen an 11 percent increase in business. However, we were already shipping to many of these states through three-tier relationships.”

Wineries Outside California Share Data

Black Star Farms, a winery focused on agritourism in Suttons Bay, Mich., in the Leelanau Peninsula AVA, reports both success and irritation. Managing Partner Don Coe says, “Black Star Farms does more DTC business than any other Michigan winery. Our wine club has 300 members with an elevated sense of awareness about DTC wine shipping because the law suit was initiated in Michigan.

“Our DTC sales account for five to six percent of total sales and our DTC shipping increased 97 percent from 2005 to 2006 and an additional 50 percent

Fig. 2: Direct sales to consumer play an increasingly significant part of St. Supery’s overall sales revenue.

from 2006 to 2007. We ship quarterly to the wine club and have special events for club members. Out-of-state shipping is a pain in the neck because regulations are different from state to state and we can’t afford internet sales.”

Proprietor/winemaker Jim Lester, Wyncroft Winery, Buchanan, Mich., says, “I have shipped to California, Illinois, D.C., Georgia, Ohio and Colorado so far. Not much of a percentage yet as we have so little wine and it all sells out in our own back yard. But the fact that the opportunity exists is very important to our national reputation and our ability to ship where no distributor would consider taking on our label.”

Wines and Vines reports that Illinois has approved DTC wine shipments from both out-of-state and local wineries beginning June 1, 2008. Wineries holding an Illinois Winery Shipper's License ($150 to $1,000 based on production) may ship up to 12 cases of wine annually to adult residents. The law also permits wineries producing under 25,000 gallons per year (10,500 cases) to self-distribute up to 2,100 cases to Illinois retailers. Over 95 percent of Illinois wineries are below this production threshold.

Paul Hahn, new president of the Illinois Wine and Grape Growers Association (IWGGA) and owner of Mackinaw Valley Vineyard in Mackinaw, Ill., said he's able to sell about 90 percent of his 2,500 annual case production DTC at the winery. New regulations will be helpful to most of Illinois' 76 producers. The Illinois grape and wine industry contributes an estimated economic impact exceeding $250 million annually, according to the Illinois Liquor Control Commission (ILCC).

The Beat Goes On

To quote the ShipCompliantBlog, “Georgia is a Go.” A distinctly tortuous law was replaced by a permit bill signed by Governor Sonny Perdue and goes into

Even with a Supreme Court ruling in DTC favor, Freethegrapes.org is still waging battles with distributor-influenced states.

effect July 1, 2008. Free the Grapes reports a summary of the bill’s provisions. “Wineries may purchase a $50 annual ‘special order shipper’s perm

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Reader Feedback

I would like to see the negative fallout of Granholm for small wineries noted. Below a certain production level (I'd guess around 2000 cases), the permitting fees and red tape associated with shipping to newly "opened" states are prohibitive. From my perspective, the only open states were the now nearly extinct reciprocal states. I realize this perception is not shared by the industry as a whole, but while the rest of you are cheering the current trend, I'm seeing the wine market contracting.

I agree with Stewart's comment [comment #1] that the increased regulation as a result of the Supreme Court's Level-Up or Level-Down ruling has in many cases changed the economics of direct shipping. We have hundreds of wineries as customers in dozens of states throughout the US who use ShipCompliant to mitigate the costs and complexity of direct shipping. Well over half of our customers ship less than 500 cases per year.

I believe the reason that these smaller wineries have continued to ship despite the challenges is because they have found a way to do so profitably. Not every state is equal; try looking at your effective state-based margin when shipping direct considering permit costs, excise tax and reporting requirements. You might find that high wine drinking states such as NY and FL are great markets to start a direct shipping program in. Once you have established a customer base in those markets, you can gradually add more states as it fits with your available production and economics. A free tool that many of our partners use to determine these state-by-state margins is our “State Break-Even Calculator”, check it out here.